Notes

ACCA Paper F2
Management Accounting
For exams in 2010

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ACCA F2 Management Accounting

ExPress Notes

Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. The Nature and Purpose of Cost and Management Accounting Cost Classification, Behaviour and Purpose Business Mathematics and Computer Spreadsheets Cost Accounting Techniques Budgeting and Standard Costing Short-term decision-making techniques

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ACCA F2 Management Accounting

ExPress Notes

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especially if the notes are very big.com . It will scare you. You must avoid these! Do a final review of the two most recent examiner’s reports for the paper you will be taking tomorrow. be it printed. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. on electronic devices or any other means of reproduction. Read through some other older ones. Leave at home. Highlight the bits that you think are important but you think you are most likely to forget. key workings. this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident you’ll remember without reviewing them. The night before the real exam Read through the ExPress notes in full. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if there’s something in an answer that you don’t understand. Given the nature of information presented in these materials. Download the two most recent real exam questions and answers. Unless there are specific bits that you feel you must revise. avoid looking at your course notes. It’s too late now.ACCA F2 Management Accounting ExPress Notes Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes. Don’t touch it! ACCA online past exams Work through the ExPress notes again. and given that legislation may change at any time. etc. Page | 5 © 2010 This material is the copyright of the ExP Group. At the door of the exam room before you go in. approaches to exam questions. Read quickly through the full set of ExPress notes. theexpgroup. Read through the technical articles written by the examiner. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. Leave at home. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. reading notes or listening to CDs). Passive revision tends to be a waste of time.g. Individuals may reproduce this material if it is for their own private use. ExP recommended exam kit This is your most important tool at this stage. Read through the two most recent examiner’s reports in detail. focusing on areas you’ve highlighted. You pass real exams by passing mock exams. Try to see if there are any recurring criticisms he or she makes. Give up on any areas that you still don’t understand. Avoid looking at them in detail. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. or ExPedite notes Avoid reading through your notes again. Don’t be tempted to fall into “passive” revision at this stage (e. photocopied.

Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions.com. our portfolio of expertise covers all areas of financial training ranging from introductory financial awareness courses for non-financial staff to high level corporate finance and banking courses for senior executives. START About The ExP Group Born with a desire to be the leading supplier of business training services. photocopied. on electronic devices or any other means of reproduction.com where you will be able to access additional free resources to help you in your studies. To maximise your chances of success in the exam we recommend you visit www.theexpgroup. Individuals may reproduce this material if it is for their own private use. Notes Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses Notes Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.ACCA F2 Management Accounting ExPress Notes Our ExPress notes fit into our portfolio of materials as follows: Notes Provide a base understanding of the most important areas of the syllabus only. and given that legislation may change at any time. through local companies to individuals furthering themselves through studying for one of the various professional exams or professional development courses. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means.com and for any specific enquiries please contact us at info@theexpgroup. the ExP Group delivers courses through either one of its permanent centres or onsite at a variety of locations around the world. Full details about us can be found at www. Our clients range from multinational household corporate names. theexpgroup. As well as courses for ACCA and other professional qualifications. Page | 6 © 2010 This material is the copyright of the ExP Group.theexpgroup.com . All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. be it printed. Given the nature of information presented in these materials. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

Relevant. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. Given the nature of information presented in these materials. User-targeted. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. and given that legislation may change at any time. theexpgroup. Individuals may reproduce this material if it is for their own private use.com . be it printed. Complete. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. Timely and Easy to use Page | 7 © 2010 This material is the copyright of the ExP Group. on electronic devices or any other means of reproduction. Authoritative. photocopied.ACCA F2 Management Accounting ExPress Notes Chapter 1 The Nature and Purpose of Cost and Management Accounting The Characteristics of Good Information The qualities of good information can be summarized in the word “ACCURATE”:         Accurate. Cost-beneficial.

plan resource allocation. on electronic devices or any other means of reproduction. evaluate investment choices and monitor/control the operating performance and the orderly conduct of the business. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. Differences in purpose and scope. compared to Financial Accounting    Aimed at internal users (as opposed to financial accounting. theexpgroup. current expenses and capital expenditure KEY KNOWLEDGE Management Accounting The process of identification. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. Given the nature of information presented in these materials. photocopied. interpretation and reporting of information used by management to set targets. accumulation. and given that legislation may change at any time. Individuals may reproduce this material if it is for their own private use. which reports past performance) Not required by law and not regulated by accounting frameworks (as opposed to financial accounting. which is aimed at external stakeholders) Focused on present and future performance (as opposed to financial accounting. measurement. but not current expenses other than marketing expenses Profit centres: Responsible for revenues and current expenses Investment centres: Responsible for revenues. preparation.com . All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. analysis.ACCA F2 Management Accounting ExPress Notes “Responsibility” centres Cost Centres Revenue Centres Profit Centres Investment Centres Cost centres: Responsible for current expenses only Revenue centres: Responsible for revenues. be it printed. which is a legal requirement and is regulated by accounting frameworks) Page | 8 © 2010 This material is the copyright of the ExP Group.

photocopied. and given that legislation may change at any time. on electronic devices or any other means of reproduction. theexpgroup. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. which provides a holistic view of company’s performance) Employs non-financial indicators as well financial.com . Individuals may reproduce this material if it is for their own private use. be it printed. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice.ACCA F2 Management Accounting ExPress Notes   Focused on specific areas or activities (as opposed to financial accounting. Given the nature of information presented in these materials. while financial accounting uses only financial measures. Page | 9 © 2010 This material is the copyright of the ExP Group. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means.

Page | 10 © 2010 This material is the copyright of the ExP Group. as they relate to the period of time in which they occur. photocopied. on electronic devices or any other means of reproduction. Non-production costs: These are expenses that are incurred independent of production and include administrative. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. Behaviour and Purpose In financial accounting. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice.com . It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. accumulated.ACCA F2 Management Accounting ExPress Notes Chapter 2 Cost Classification. it is a convention to break down costs into: KEY KNOWLEDGE Production vs. and given that legislation may change at any time. theexpgroup. also variable and fixed) which relate to the production of goods. selling. Individuals may reproduce this material if it is for their own private use. These costs can have the character of “period” costs. be it printed. Given the nature of information presented in these materials. which provide the value at which goods are placed in inventory (prior to sale) and form the “cost of goods” value when sold. It is these costs. distribution and finance costs. this is also referred to as manufacturing or factory cost. Non-Production costs Production costs: These are costs (both direct and indirect.

All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Variable costs Fixed costs: are costs that remain constant regardless of the volume of production.ACCA F2 Management Accounting ExPress Notes KEY KNOWLEDGE Direct vs. “Although a variable cost increases with the level of activity. KEY KNOWLEDGE Fixed vs. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. but at a certain level of output increase in a significant way to a new (fixed) level. the variable cost per unit remains fixed. Direct costs are by their nature variable in behaviour. and given that legislation may change at any time. Indirect costs Direct costs: are costs that can be directly attributable to a product. Individuals may reproduce this material if it is for their own private use.com . Given the nature of information presented in these materials. on electronic devices or any other means of reproduction. A variety of indirect costs are fixed. photocopied. while a fixed cost per unit falls with a rise in the level of activity. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. Variable costs: vary in proportion with the volume produced.” Other types of costs: Mixed costs: these are costs that contain a fixed and a variable element. Page | 11 © 2010 This material is the copyright of the ExP Group. theexpgroup. be it printed. Step costs: costs that remain fixed within a defined range of production. Indirect costs: these are costs that cannot be directly attributable to a product.

photocopied.0 81. Individuals may reproduce this material if it is for their own private use.6 Page | 12 © 2010 This material is the copyright of the ExP Group.6 402.ACCA F2 Management Accounting ExPress Notes Chapter 3 Business Mathematics and Computer Spreadsheets Expected Value This is the average of possible outcomes weighted by the probability of each outcome. Profit/(Loss) 340 766 278 450 -230 Expected Probability Value 10% 20% 50% 18% 2% 100% 34. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means.0 -4. be it printed.2 139. and given that legislation may change at any time.0 153. Given the nature of information presented in these materials. on electronic devices or any other means of reproduction.com . The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. theexpgroup. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice.

on electronic devices or any other means of reproduction. Page | 13 © 2010 This material is the copyright of the ExP Group. The range for r is: -1 < r < +1 The coefficient of determination measures the degree to which the variation in the dependent variable can be explained by the independent variable (x). It is denoted as r 2 and its range is: 0 < r2 < 1 The use of spreadsheets is a basic skill that all accountants should possess. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. Individuals may reproduce this material if it is for their own private use. and given that legislation may change at any time. Given the nature of information presented in these materials. photocopied. be it printed. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means.ACCA F2 Management Accounting ExPress Notes Regression analysis This is a statistical tool used to describe the relationship between two sets of variables.measures the strength of the linear association between the variables. The correlation coefficient – denoted by r -.com . All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. theexpgroup.

com . receiving and issuing of materials from inventory must be controlled according to procedures and documented at all stages with forms appropriate to the purpose. Economic Order Quantity This is a method which seeks to minimize the costs associated with holding inventory. To determine the total costs. Individuals may reproduce this material if it is for their own private use. Given the nature of information presented in these materials. on electronic devices or any other means of reproduction. be it printed.ACCA F2 Management Accounting ExPress Notes Chapter 4 Cost Accounting Techniques Materials The ordering. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. the purchase price) H = cost of holding one unit for one year Page | 14 © 2010 This material is the copyright of the ExP Group. photocopied. The controls and procedures are designed to monitor inventory movements so as to minimise discrepancies and losses and theft. the following data is required: Q = order quantity D = quantity of product demanded annually P = purchase cost for one unit C = fixed cost per order (not incl. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. theexpgroup. and given that legislation may change at any time.

Given the nature of information presented in these materials. be it printed. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. Individuals may reproduce this material if it is for their own private use. and given that legislation may change at any time. theexpgroup. Indirect labour (e. photocopied. Ordering costs rise the more frequently one places (during the year). It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. The optimal order quantity (Q*) is found where the Ordering and Holding costs equal each other.g. the supervisor’s salary or that of a security guard) forms part of overhead costs. and Holding costs rise the fewer times one places orders (due to larger quantities being ordered each time). i. It follows that there is a trade-off between the Ordering and the Holding costs. on electronic devices or any other means of reproduction.com . Page | 15 © 2010 This material is the copyright of the ExP Group. C x D/Q = H x Q/2 Rearranging the above and solving for Q results in Labour Direct labour refers to work which is directly involved in the manufacture of a product.e.ACCA F2 Management Accounting ExPress Notes The total cost function is as follows: Total cost = Purchase cost + Ordering cost + Holding cost which can be expressed algebraically as follows: TC = PxD + C x D/Q + H x Q/2 It is this total cost function which must be minimized. Recognizing that:    PD does not vary.

or Contribution = Sales – Variable costs (both production and non-production) Page | 16 © 2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. and normally after the product leaves inventory. Given the nature of information presented in these materials. and given that legislation may change at any time. photocopied. be it printed.com . Reapportion from Service to Production Production A Production B 4. theexpgroup. Total Production Costs Direct Costs Indirect costs (overheads) 2. The diagram below provides a useful roadmap. Overhead costs that are not incurred at the time of production do not find their way into inventory.ACCA F2 Management Accounting ExPress Notes Absorption Costing This is one method which seeks to make the link between overheads and (product) cost units. It is useful to think of production costs as being those that end up as part of the inventory (valuation) while other (non-production) costs are incurred outside. Contribution Contribution is defined as the difference between Sales revenue and the marginal cost of sales. Allocate Production B Service C 3. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. Allocate/Apportion to Cost Centers Production A 1. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. on electronic devices or any other means of reproduction. Absorb Cost Unit The focus (above) is production.

150 $16.100 1. photocopied.500 $ 7. Selling price (per unit): Cost card (per unit): Direct materials Direct labour Variable production O/Hs Total variable costs There is a variable selling cost of $2 per unit Year 1 (units) Budget (normal) production Actual Production Actual Sales Actual fixed production O/Hs Actual SGA costs 1.ACCA F2 Management Accounting ExPress Notes Marginal costing A marginal approach to costing focuses on the variable (marginal) costs generated in a business and considers fixed costs as period costs. a profit and loss statement for the Years 1 and 2 is shown on the next page.500 $ 7. be it printed. Assume that the beginning inventory is zero.com . It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. Individuals may reproduce this material if it is for their own private use. on electronic devices or any other means of reproduction.100 1. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. This allows the company to be able to quantify the amount by which its costs rise. Example Below is data on a manufacturing company.000 Year 2 (units) 1. Page | 17 © 2010 This material is the copyright of the ExP Group. theexpgroup.100 1. and given that legislation may change at any time. if it produces/sells an additional unit of output. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.000 120 45 18 9 72 Based on the above data.000 950 $16. Given the nature of information presented in these materials.

Accounting conventions require that fixed production costs be reflected in each unit produced. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. Absorption Costing This method argues that focusing on marginal costs is potentially misleading in the longer run because fixed production costs have also to be covered.200 (3.500) (7.600 114.000 79.700 (16.200 (82. on electronic devices or any other means of reproduction.000) 20.500) (7.ACCA F2 Management Accounting ExPress Notes Profit/Loss (Marginal costing) Year 1 $ Sales (950/1.400 Inventory is valued at variable production costs.600) 0 0 3. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. be it printed.000 Year 2 $ 138.150 x $2) Contribution Less: Fixed production O/Hs Less: SGA costs Profit (68.100 X $72) 72.com . and given that legislation may change at any time. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.900 (16.800) (2.300) 52.900) 43.000 Less: closing inventory (50 x $72) Less: Variable selling costs (950 x $2) (1. Given the nature of information presented in these materials.000) 29. theexpgroup. Page | 18 © 2010 This material is the copyright of the ExP Group. photocopied.000 x $72) (1.400) (1. Individuals may reproduce this material if it is for their own private use.150 units) Less: Variable cost of sales Opening inventory Production costs: o Variable (1.

500 (84.650 Inventory is valued at the full production costs. Given the nature of information presented in these materials.350 114.100 X $15) 72. be it printed.350) 1.900 7.100 X $72) Fixed (1.150) 29. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.300) 28.000 x $72) (1. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice.950 Less: closing inventory (50 x $87) Over/(under) absorption Gross Profit Less: Variable selling costs (950 x $2) (1.300 7.950 2. Page | 19 © 2010 This material is the copyright of the ExP Group. photocopied.500 (4.900) 20.150 x $2) Less: SGA costs Profit 1. and given that legislation may change at any time.000 Year 2 $ 138.000 (9. theexpgroup. Individuals may reproduce this material if it is for their own private use. on electronic devices or any other means of reproduction.000 45 18 9 15 87 79.000 16.850 0 0 (100.050) 37.ACCA F2 Management Accounting ExPress Notes Revised cost card (Absorption costing) Cost card (per unit): Direct materials Direct labour Variable production O/Hs Fixed production O/Hs Total production costs Profit/Loss (Absorption costing) Year 1 $ Sales (950/1.000 x $15) (1.200 o 15.150 units) Less: Variable cost of sales Opening inventory Production costs: o Variable (1.000 0 4.com .000 (8.

theexpgroup. and possibly unique. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. photocopied. then to the Page | 20 © 2010 This material is the copyright of the ExP Group. Process Costing Process costing is a technique that applies to the mass production of a large number of identical products. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. which are numbered (separately identified) for this purpose. on electronic devices or any other means of reproduction. This is appropriate in situations where each product or service is distinct. and given that legislation may change at any time. the distinction lies in the identification of costs with specific batches. If losses occur along the way that necessitate the scrapping of defective units. Given the nature of information presented in these materials.com . moving through a series of processing stages. The average cost is determined by the following formula: Average cost per unit = Total cost of inputs – Scrap value of rejected units No. Batch costing is similar to job costing.ACCA F2 Management Accounting ExPress Notes Summary of Absorption costing and Marginal costing formats Absorption Costing Revenue Less: Cost of Sales Variable/Fixed production costs Gross profit Less: Expenses Variable/Fixed non-production costs Net Profit Marginal Costing Variable production/ non-production costs Contribution Fixed production/ non-production costs Job costing / Batch costing This refers to the calculation of costs associated with a specific job or customer order. in its delivery. The accumulated costs of production can be averaged over the number of items produced. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. materials and overhead costs of production. of units of input – Normal loss The total cost of inputs refers to labour. be it printed. Individuals may reproduce this material if it is for their own private use.

The number of good units emerging from a process will therefore be the number of units entering it.ACCA F2 Management Accounting ExPress Notes extent that these items fetch a scrap value. processing costs are averaged over all the units. on electronic devices or any other means of reproduction. the costs of production during the joint processing cannot be physically distinguished. Until they go their own (separate) ways. Since all the units. minus the expected number lost in processing. tons. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. FIFO costing separates the costs that were incurred in the previous period from costs of the current period. are visually identical. Similarly. Weighted average method The weighted average method makes no distinction between units that were started (but not finished) in a previous process and those started in the current process. Given the nature of information presented in these materials. then that (scrap) value will reduce the total costs. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. photocopied. or some other objective physical measurement) Net realizable value = Final sales value – Incremental processing costs Page | 21 © 2010 This material is the copyright of the ExP Group. when completed. Abnormal gains and losses are accounted for as an adjustment to the accounts using the same value as the “good” output (deducted in the case of loss and added in the case of gains). There are different methods used to apportion common costs to such products at the point of separation:    Market value (based on expected sales price) Number of units (litres.com . It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. theexpgroup. Equivalent units (EU) This refers to the way in which partially-completed output (“work-in-progress” or WIP) is expressed. which is normally expressed in monetary terms. First-In-First-Out (FIFO) method The FIFO method does make a distinction between units that were started in a previous process and those begun in a current process. Joint products / By-products Joint products are two or more products that share a common processing path until the point of separation. Individuals may reproduce this material if it is for their own private use. It is therefore considered to have an EU of 35%. and given that legislation may change at any time. then the unit has a degree of completion of 35% in terms of value. an accounting is made of the number of units introduced into a process with the expectation that a normal loss will be incurred. be it printed. If an unfinished unit of product contains 35% of the labour and materials costs of a complete unit.

All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. though the amount is modest in comparison to the overall revenues of the firm. on electronic devices or any other means of reproduction. Individuals may reproduce this material if it is for their own private use. and given that legislation may change at any time. Page | 22 © 2010 This material is the copyright of the ExP Group. photocopied.ACCA F2 Management Accounting ExPress Notes By-products are goods which are incidental to the production process and which generate cash from sales. be it printed. theexpgroup. Given the nature of information presented in these materials. The cash received for by-products can be viewed as a bonus that reduces production costs.com . It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.

com . All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. and given that legislation may change at any time. Individuals may reproduce this material if it is for their own private use. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. Given the nature of information presented in these materials. expressed in financial. quantitative and qualitative measures Page | 23 © 2010 This material is the copyright of the ExP Group. photocopied. be it printed. on electronic devices or any other means of reproduction. preferably revised on a regular basis (rolling budget) Based on organization’s objectives. theexpgroup. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. used to: a) Communicate Objectives b) Motivate Employees b) Control Activities b) Evaluate Performance The master budget process   Annual frequency.ACCA F2 Management Accounting ExPress Notes Chapter 5 Budgeting and Standard Costing Budgeting: definition and purpose Quantitative plan for the future.

Marketing budget. photocopied. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. Admin budget Pro-forma income statement The financial budget sequence    Capital budget Cash budget Pro-forma balance-sheet and pro-forma statement of cash-flows Operating budgets These are budgets that quantify the revenues and costs relating to a company’s activities at a disaggregated level. etc.ACCA F2 Management Accounting ExPress Notes The operating budget sequence        Sales budget Production budget Ending inventory budget Direct materials budget. theexpgroup. and given that legislation may change at any time. Given the nature of information presented in these materials. Examples include:        Sales budget Production budget Direct material usage Direct material purchases Direct labour budget Factory overhead budget Selling & distribution budget Page | 24 © 2010 This material is the copyright of the ExP Group. Operating budgets are modelled on what will emerge as the company’s income statement. on electronic devices or any other means of reproduction. units of output. Factory overhead budget Cost of Sales budget R&D budget.) and price specifications. quantities.g. Individuals may reproduce this material if it is for their own private use. meaning that there is direct input from department and functional levels. Customer service budget. Distribution budget. hours. be it printed. Direct labour budget. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice.com . They require both volume (e.

Given the nature of information presented in these materials. Output: 1. or production may be constrained by the built capacity of the plant or by the level of demand for a company’s products. there is a limiting factor at work. It allows management to re-focus their efforts without losing time tracking “artificial” spending excesses according to the original budget. theexpgroup. be it printed. Example A producer of office equipment has a budget for the coming year: Output: 1.e.000 Page | 25 © 2010 This material is the copyright of the ExP Group.000 units Costs: Materials 75.200 units Costs: Materials 90.000 Total 375. 20% higher than originally projected and it has therefore increased its production by a similar amount. i. management must identify any factors that will prevent the company from surpassing a certain level of activity.000 Labour 200. the company observes that sales are running ca. Fixed vs. on electronic devices or any other means of reproduction. for example.ACCA F2 Management Accounting ExPress Notes  Administrative expenses budget The “disaggregation” of budgets referred to above allows the practice of “responsibility” accounting. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means.com . flexible budgets Traditional budgets tended to be rigid. In each of these cases. Principal budget factor When a budget is prepared. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. they were not subject to modification during the period to which they referred.000 After 3 months. may be constrained from developing an extensive branch network owing to the scarcity of suitably-skilled professional staff. this is effectively a re-calibration of the original budget. management can prepare a “flexed” budget. and given that legislation may change at any time. A bank. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.000 Fixed O/Hs 100. In order to look back at what its budget would have been had the actual (higher) level of activity been anticipated. Individuals may reproduce this material if it is for their own private use. photocopied.

000 200.000 100.100 $16.500 Year 2 (units) 1.com .500 Budget (normal) production Actual fixed production O/Hs Fixed Overhead Absorption Rate (FOAR) = $15 ($16.375.000 1000 75.100 $16. photocopied.000 100.000 375. Based on the data (below).000 Output: Mats Labour Fix Total Therefore the cost of labour at output of 1. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. Accounting conventions require that fixed production costs be reflected in each unit produced.000 100. and given that legislation may change at any time. Absorption Costing This method argues that focusing on marginal costs is potentially misleading in the longer run because fixed production costs have also to be covered.ACCA F2 Management Accounting ExPress Notes Labour Fixed O/Hs Total 225. the   variable cost of labour is $125 per unit. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means.000 415.075 units.100) Cost card (Absorption costing) Page | 26 © 2010 This material is the copyright of the ExP Group.075 units is $209.000 Prepare a flexed budget for an output level of 1. theexpgroup. on electronic devices or any other means of reproduction.500/1. Given the nature of information presented in these materials. Fixed Overhead Absorption Rate (FOAR) = Budgeted production O/H Budgeted level of production Year 1 (units) 1. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice.000 415.000 1200 90. Individuals may reproduce this material if it is for their own private use. be it printed. and the fixed cost of labour is $75.000 225.

000 Sales price: $115 / unit Cost card (per unit) Materials (5kgs x $9 per kg) Labour (3hrs x $6 per hr) Variable O/Hs (3 hrs x $3 per hr) Fixed O/Hs (3 hrs x $5 per hr) 45 18 9 15 87 Variance calculations Sales volume variance (Absorption costing) Page | 27 © 2010 This material is the copyright of the ExP Group. photocopied.900 kg. $45.025 Labour: 3. on electronic devices or any other means of reproduction. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. theexpgroup.100 hrs.050 Variable O/Hs: $9. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. be it printed.250 Fixed O/Hs: $17. we now have a basis on which the production department can keep track of the fixed overheads being generated as the manufacturing process proceeds. $19. Actual output (units) x OAR = Fixed O/H absorbed Basic variance analysis The following data is from a manufacturing company Budget Production: Sales: Sales Price: 1. Given the nature of information presented in these materials.000 units $120 / unit Actual results Production: 1. Individuals may reproduce this material if it is for their own private use.com .ACCA F2 Management Accounting ExPress Notes Cost card (per unit): Direct materials Direct labour Variable production O/Hs Fixed production O/Hs Total production costs 45 18 9 15 87 Having established the OAR.000 units Sales: 950 units Materials: 4. and given that legislation may change at any time.100 units 1.

The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.650 (A) Sales volume variance (Marginal costing)   Budgeted sales volume Actual sales volume 1.025 $925 (A) 114. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. theexpgroup.100 45.750 (A) Page | 28 © 2010 This material is the copyright of the ExP Group.400 (A) Sales price variance   950 units should have sold @$120 Actual revenues (950 units x $115) Sales price variance Material variances (i)   Material price variance Materials used (4. on electronic devices or any other means of reproduction. Individuals may reproduce this material if it is for their own private use.000 units should have used @ 5 kg 5. Given the nature of information presented in these materials.900 kg) should have cost @ $9 Materials (4.000 kg 44.000 950 Sales volume variance 50 (A) @ standard contribution ($120-$72) $2.000 950 50 (A) $1.250 4. photocopied. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice.000 109. be it printed.com .ACCA F2 Management Accounting ExPress Notes   Budgeted sales volume Actual sales volume Sales volume variance @ standard margin ($120-$87) 1.900 kg) did cost Materials price variance (ii)  Material usage variance 1. and given that legislation may change at any time.

theexpgroup.000 units did take Labour efficiency variance @ standard $6 Labor total variance: Variable O/H variances (i)   Variable O/H expenditure variance 3.100 hrs 100 hrs (A) $600 (A) $ 1.250 50 (F) 3.100 hrs should have cost @ $3 3. and given that legislation may change at any time. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.000 units should have taken @ 3 hrs 1. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. on electronic devices or any other means of reproduction. Individuals may reproduce this material if it is for their own private use.050 (A) 18.100 hrs) should have cost @ $6 Labour (3.ACCA F2 Management Accounting ExPress Notes  1.900 kg 100 kg (F) $900 (F) $ 25 (A) Labour variances (i)   Labour rate variance Labour (3. photocopied.100 hrs 9.000 hrs 3.600 19. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. Given the nature of information presented in these materials.300 9.000 units did take 3.100 hrs) did cost Labour rate variance (ii)   Labour efficiency variance 1.000 hrs 3.com . be it printed.100 hrs did cost Variable O/H expenditure variance (ii)   Variable O/H efficiency variance 1.000 units should have taken @ 3 hrs 1.000 units did use Materials usage variance @ standard $9 Materials total variance: 4.050 $450 (A) Page | 29 © 2010 This material is the copyright of the ExP Group.

Individuals may reproduce this material if it is for their own private use.000 units x $15) Fixed O/H total variance $17.com .000 (A) This can be broken down into two components: (i)   Fixed O/H expenditure variance Budgeted O/H should have cost (1. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. and given that legislation may change at any time. on electronic devices or any other means of reproduction. photocopied.000 $ 2. theexpgroup.000 $500 (A) Interpreting variances Material price Page | 30 © 2010 This material is the copyright of the ExP Group.100 units 1.100 units x $15) 16.ACCA F2 Management Accounting ExPress Notes Variable O/H efficiency variance @ standard $3 Variable O/H total variance: 100 hrs (A) $300 (A) $ 250 (A) Fixed O/H total variance (Absorption costing)   Overhead actually incurred Overhead absorbed (1. Given the nature of information presented in these materials. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. be it printed.000 units 100 units (A) $1.500 Actual O/H cost Fixed O/H expenditure variance (ii)   Fixed O/H volume variance (Absorption Costing) Budgeted production Actual production Fixed O/H volume variance @ standard $15 1.500 (A) 17.000 $15.

better materials and/or equipment Poorly trained workers. poor quality control. on electronic devices or any other means of reproduction. theft Low pay rates. more efficient use of ancillary services Poor cost disciplines.ACCA F2 Management Accounting ExPress Notes Favourable: Adverse: Material usage Favourable: Adverse: Labour rate Favourable: Adverse: Labour efficiency Favourable: Unanticipated discounts received. motivated/better trained workers. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. better purchasing/negotiation. cheap workers Wage inflation More efficient production. photocopied. more efficient processing Substandard material.com . and given that legislation may change at any time. better quality materials Better quality materials. complexity and bureaucracy Page | 31 © 2010 This material is the copyright of the ExP Group. poor purchasing. Given the nature of information presented in these materials. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. materials or equipment Adverse: Overhead expenditure Favourable: Adverse: Overhead volume Favourable: Adverse: Using production capacities beyond the level budgeted Under-utilization of production capacities Cost savings. theexpgroup. cheaper (substandard) materials Price inflation. be it printed. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. waste. Individuals may reproduce this material if it is for their own private use. deficient work organization.

It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. photocopied. Given the nature of information presented in these materials.600 Cost variances: Materials Price Usage Labour Rate Efficiency Variable Expenditure 50 450 600 900 F A 925 33. a factor causing a favourable variance may at the same time be the cause of an adverse variance in another part of the company’s operations. and given that legislation may change at any time. At the same time. be it printed. on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. and if possible quantify. Individuals may reproduce this material if it is for their own private use. management needs to review standards for their relevance and usefulness. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. It is management’s responsibility to understand these relationships and to be able to anticipate.000 Page | 32 © 2010 This material is the copyright of the ExP Group.com . Budgeted profit (Absorption costing) Sales volume variance Sales price variance 1. the impact of their actions on overall performance. theexpgroup. as well as apply common sense to the materiality and controllability of specific variances.ACCA F2 Management Accounting ExPress Notes Inter-connections among variances As can be seen above.750 (A) 26.650 (A) 4. Reconciliation of budgeted profit and actual profit Operating statement Prepare a reconciliation between the profit budgeted and that realized.

theexpgroup. Individuals may reproduce this material if it is for their own private use. on electronic devices or any other means of reproduction.325 (A) 450 600 900 F A 925 48.500 4.000 Page | 33 © 2010 This material is the copyright of the ExP Group. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice.ACCA F2 Management Accounting ExPress Notes Efficiency Fixed Expenditure Volume 950 Actual profit 300 500 1.275 Note: Closing inventory is valued at standard cost Operating Statement based on Marginal costing Budgeted contribution (Marginal costing) Sales volume variance Sales price variance 2. and given that legislation may change at any time.750 (A) 40.325 (A) 23.850 Cost variances: Materials Price Usage Labour Rate Efficiency Variable Expenditure Efficiency 50 950 300 2. be it printed.275 3. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.275 1. Given the nature of information presented in these materials.com .400 (A) 4. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. photocopied.

000) 22. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.ACCA F2 Management Accounting ExPress Notes Actual contribution Fixed O/Hs Budgeted Fixed O/Hs Expenditure variance Actual profit 16. Individuals may reproduce this material if it is for their own private use.com . photocopied. theexpgroup. and given that legislation may change at any time.500 500 39. be it printed. on electronic devices or any other means of reproduction.525 (17.525 Page | 34 © 2010 This material is the copyright of the ExP Group. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials.

Page | 35 © 2010 This material is the copyright of the ExP Group. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means.ACCA F2 Management Accounting ExPress Notes Chapter 6 Short-term decision-making techniques Cost-Volume-Profit (CVP) Analysis The breakeven formula Total Costs = Fixed Costs + Unit Variable Cost x Number of Units Total Revenue = Sales Price x Number of Units If TC = Total Costs. FC = Fixed Costs. X = Number of Units. photocopied. on electronic devices or any other means of reproduction. Given the nature of information presented in these materials. SP = Selling Price. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Individuals may reproduce this material if it is for their own private use. and given that legislation may change at any time.com . V = Unit Variable Cost. be it printed. TR = Total Revenue. theexpgroup.

Individuals may reproduce this material if it is for their own private use. be it printed. The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. the firm may prefer to produce/sell below break-even in order to recover some of its fixed costs. Then the break-even point (the output level at which TR=TC) is:   In units sold: X = FC/C In dollar sales: TR = FC/CM%   Safety Margin = Budgeted Sales – Break-even point (units/dollars) C is an important indicator.ACCA F2 Management Accounting ExPress Notes C = SP – V = Unit Contribution and CM%= C/SP = Contribution Margin.com . Given the nature of information presented in these materials. theexpgroup. Relevant costs. in the short run.  Applying incremental analysis in business decision-making  Accept or reject a special order o Accept if selling price exceeds variable production cost and there is spare capacity Make (in-sourcing) or buy (out-sourcing)  Page | 36 © 2010 This material is the copyright of the ExP Group. Therefore. incremental analysis and linear programming  Relevant costs are costs expected to vary with the action taken o Past (sunk) costs are irrelevant o Fixed costs are irrelevant if there is idle capacity o Variable (marginal) costs are relevant o Opportunity costs (foregone benefits) are relevant Incremental analysis uses relevant costs in order to quantify the short-term effects of business decisions taken. as it shows the contribution of each unit sold towards covering fixed costs. on electronic devices or any other means of reproduction. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means. photocopied. and given that legislation may change at any time. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice.

The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases. The constraints may be equalities or inequalities. Given the nature of information presented in these materials.ACCA F2 Management Accounting ExPress Notes   o Outsource least efficient activities if full capacity reached Capital budgeting o Invest if marginal cost of investing is below marginal cost of not investing (marginal benefit foregone) Disinvestment o Divest if (marginal revenue generated + cost of resulting idle capacity + severance payments + restoration costs) fall below marginal cost of production + salvage value of assets Determining optimal mix of products where there are limiting factors It addresses the problem of maximizing or minimizing a linear function subject to linear constraints. theexpgroup. be it printed. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Individuals may reproduce this material if it is for their own private use. (end of ExPress Notes) Page | 37 © 2010 This material is the copyright of the ExP Group. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means.com . photocopied. on electronic devices or any other means of reproduction. and given that legislation may change at any time.

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