Mnemonics and Charts



Paper F5: Performance Management

©Tony Surridge Online Limited, 2012


Mnemonics and Charts



Paper F5: Performance Management

ACCA Paper F5: PERFORMANCE MANAGEMENT Mnemonics and Charts
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Mnemonics and Charts



Paper F5: Performance Management

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Mnemonics and Charts



Paper F5: Performance Management

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Click below.” Lewis Carroll Through the Looking-Glass ©Tony Surridge Online Limited. 2012 www. “Begin at the 5 . Specialist cost and management accounting techniques Decision-making techniques Budgeting Standard costing and variance analysis Performance measurement and control Contents page Questions and Answers Formulae sheet Only part of this section is hyperlinked for this Free Sample “Where shall I begin.” the king said gravely. Vocalising Initial letters and making phrases The use of mnemonics The use of jingles Word association Visualising Link/story technique Do I need to memorise all your mnemonics? Disguise your use of mnemonics in the exam Charts Colour codes Electronic links within the database ACCA Paper F5 Performance Management Mnemonics and Charts Syllabus The structure of the syllabus Intellectual levels Learning hours Guide to exam structure Guide to examination assessment Aim Main capabilities Relational diagram of main capabilities Rationale Detailed syllabus Approach to examining the syllabus Study Guide A B C D E Specialist cost and management accounting techniques Decision-making techniques Budgeting Standard costing and variance analysis Performance measurement and control Sections Combined Charts and Mnemonics.tonysurridge.Mnemonics and Charts +AddVance MAIN PAGE FORMULAE Paper F5: Performance Management Main Page ISBN and Copyright statement For the ladies only Why study from a computer screen? Memorising: Tips and techniques Writing or saying things over and over again ….co. “and go on till you come to the end: then stop. please your majesty?” he asked. 6 . 2012 www.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Specialist cost and management accounting techniques ACCA Paper F5 Performance Management ©Tony Surridge Online Limited.

by way of information and advice.tonysurridge. dependency on the ecosystem. customer empowerment and fragmented (and yet further fragmenting) markets require companies to be competent in: flexibility (quick response to change). the need for organisational integration as well as differentiation (a 'quilt-work' of vertical and horizontal separation of responsibilities and work but achieving common goals).co. These facts set the scene for what you study.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Modern industry – 1 of 2 'Modern industry' and 'world class manufacturing' are convenient labels given to a series of fundamental changes introduced by many manufacturing (and service-providing) companies over the last few decades. A management accountant supports 7 . versatility (multi-need capacity). The modern business environment The following points briefly summarise the main characteristics of modern business: (a) Complex and dynamic environments Although not relevant to all organisations. Please go to the next screen ©Tony Surridge Online Limited. to consider the concepts of modern industry before looking further at the work of modern management accounting and performance reporting. most business concerns face difficult environments which relate to: (i) (ii) (iii) (iv) (b) open-systems characteristics and associated uncertainty. During your studies of Paper F5 bear in mind the role of a management accountant. quality and innovation. 2012 www. Furthermore. the need for equal-finality (organisations with similar objectives achieved by pursuing different strategies). These needs have resulted in the development and use of advanced manufacturing technologies (AMT). Difficult business environments Most organisations now face very competitive business environments. how you study and the way you answer exam questions. and managers themselves make decisions and take control actions in an extremely tough and demanding ‘modern industry’. which place particular demands on management information systems. It is beneficial for our study of management accounting and performance management.

Since the invention of the integrated circuit. the number of transistors that can be placed inexpensively on an integrated circuit has increased exponentially. the demands of modern industry on the information and support which managers now depend upon has led to the development and application of new and additional management accounting techniques.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Modern industry – 2 of 2 (c) High overhead costs In modern industry (and with the view that labour cost is largely fixed) the majority of costs are overheads. however. In manufacturing concerns overhead costs have risen to as much as 80 per cent of the total cost. ©Tony Surridge Online Limited. Moore's law describes a long-term trend in the history of computing hardware. It had an 8-bit external data bus instead of the 16-bit bus of the 8086. a number of which are included in the Paper F5 syllabus.tonysurridge. However. Some commentators suggest that it started in the early 1980s with the introduction of Intel’s 8088 microprocssor. The Intel 8088 microprocessor was a variant of the Intel 8086 and was introduced on July 1. Management accounting methods and techniques have developed to meet the exacting demand of modern industry For our purposes we can assume that ‘traditional industry’ started in the 1920s with the beginnings of what are now huge corporate concerns. Traditional management accounting techniques were developed or refined from this time. The impact of 'modern industry' on the management accountant Although management accounting practices and techniques were developed in the days of what is often called 'traditional industry' many of them are still relevant and used in today's industrial 8 . The 16-bit registers and the one megabyte address range were unchanged. Some of these techniques are still used by organisations. 2012 www. doubling approximately every two years. This has had an enormous impact on industry and society in general. Practice question which makes reference to modern industry: Linacra Co Page The original IBM PC was based on the 8088. 1979. (d) It is difficult to exactly define the term ‘Modern industry’. and in service-providing organisations can exceed 90 per cent.

Expert systems.JIT orientation/systems . linked to ‘critical success factors’* Management Accounting Response (Knowledge of information technology (IT) systems not specifically covered on the Paper F5 syllabus but the role of IT in modern management accounting should always be considered.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Traditional versus modern Industry Main performance measurement focus: Responsibility accounting: investment/profit/cost and revenue centres.Systems that are flexible and versatile .uk 9 .‘Balanced scorecard’ performance indicators* .Throughput accounting* .) Important objectives of modern management: competitiveness quality flexibility innovation resource utilisation Impact on Business Practice IMPACT OF MODERN INDUSTRY ON THE MANAGEMENT ACCOUNTANT - - Design and use of ‘Executive Support Systems (ESS).Activity-based Costing* .Target costing (use of ‘drifting’ instead of ‘standard’ costs’)* .co. 2012 www.) . Decision Support Systems (DSS).Customer profitability Analysis (CPA) as well as Product Profitability Analysis (PPA)* .Focus on quality (TQM) . ‘first-piece’ inspection’ etc. Standard costing Variance analysis Linear programming Extrapolation-based forecasting techniques ‘Traditional’ Industry Mainly manufacturing based Mass production (single high-volume product focus) Dedicated machinery Semi-skilled direct labour A high proportion of manual work High direct costs (materials and labour) Feedback systems of control (based on ‘correction’) Low production overhead costs - CHANGES - Competitive (hostile) Fragmented markets Dynamic change Environmental complexity Environmental uncertainty Customer empowerment Modern Business Environment A ‘HOSTILE BUSINESS WORLD’ .Increase in production overhead costs (engineering support. set-ups.Back-flush accounting systems* .Just-in-Time (JIT): cost tracking and performance measurement .Use of advanced manufacturing technologies (AMT) .Feed forward cybernetic control systems (as well as the use of sophisticated feedback systems) .Quality management and performance measurement .tonysurridge.Emphasis on ‘world class manufacturing’ .Life-cycle costing* * covered by the ACCA Paper F5 syllabus ©Tony Surridge Online Limited.Activity-based budgeting .Small production runs . Data warehousing and data mining systems Competitive analysis and appraisal Environmental scanning and analysis Strategic benchmarking Non-financial key performance indicators.

marketing. Splintered. particularly fixed overhead costs. China and India. very competitive) business environments. Rapid change in market structures – for instance the recent growth in the economies of Brazil. Dynamic (change which causes more change) business environments 10 . L D Memory jog: Remember the business environment of ‘Modern Industry’ is a ‘HOSTILE WORLD’. Empowered customers – with resultant rapid change of needs and market competitiveness. Legal complexity and rapid change. World-wide competition leading to global and international strategy. it must be important. If two line on a graph or fragmented markets with small but varied market segmentation. Impact of information technology (IT) in all areas – communication. product/service design/production. Overhead costs are now very significant. ‘Large company’ growth – acquisitions creating large corporate bodies. is pervasive. February 1985 ©Tony Surridge Online Limited. including the impact of international conflicts of legislation. Technological sophistication (for even small companies) including the uses of ‘Advanced Manufacturing Technologies (AMT)’. etc.Cooke University of Baltimore Remark to a student.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Modern industry The characteristics of modern industry that would influence and affect the work of a strategic management accountant are: H O S T I L E W O R Hostile (in other words.tonysurridge. Organisational delayering and decentralisation of decision making. 2012 www. Ernest F.

This results from a reduction in the number of levels in the management hierarchy. A modern approach is to build a small core of specialist competent full-time and permanent staff alongside a periphery of temporary part-timers or contract workers.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Modern organisation structures Hostile. innovation. dynamic and complex business This provides the organisation with ability to be versatile. 2012 11 . is that the development of modern information technology (IT) has given senior managers direct lines of communication and control with work at the operating level. M O D Matrix-based teamwork. hostile and complex business environments. E R N Networking.tonysurridge. and organic but at the same centralising strategic services (to achieve big-spend economies). The following approaches influence organisational structuring in modern industry. market creation. Another way of attempting to achieve versatility. including the development of advanced manufacturing technologies and information technology and the impact of global competitive forces. Outsourcing. Networking involves franchising. flexibility and responsiveness is to re-structure the organisation on the basis of small ‘strategic business units’ which will be flat. The employment of external organisations to take over functions which they can perform more effectively than the organisation outsourcing the work. flexible and responsive to short-term events. project development. product-market partnerships and other forms of strategic alliances. Delayering. usually by removing middle level (‘mid-line) management. Memory jog: in an attempt to deal with dynamic. or which releases assets and resources the organisation can use more effectively. ’A MODERN’ organisation structure evolves. Reconstructing as ‘small within big’. and to meet world-class standards. etc. One reason. other forms of collaborative ventures. A Activity-based management. ©Tony Surridge Online Limited. has led organisations to review and usually change from the traditional hierarchically-based line-and-staff structure to other structures and mechanisms that are more suitable. Matrix-based organisations are the use of multi-disciplinary teams involved in creativity. Employment of core-based management teams. Many organisations are now restructuring around activities (‘Activity Based Management’ (AMB)) which is often linked to re-engineering activities on the ‘value chain’. thus making much of the role of middle-level managers superfluous.

Increase in use of ‘general purpose technology’ and engineering ‘set ups’.tonysurridge. control and logistics. WHY? WIDE CHOICE OF SUPPLIERS AND PRODUCTS CUSTOMER EMPOWERMENT DEMANDS FOR PRECISE NEEDS INCREASE IN TYPES AND VARIETIES OF PRO0DUCTS MARKET FRAGMENTATION Market fragmentation results from the management process of market ALL OF WHICH MEANS AN INCREASE IN OVERHEAD COSTS! ©Tony Surridge Online Limited. SMALL PRODUCTION RUNS (BATCHES) IMPLICATIONS Wide range of materials required (inventory problems). Increase in production services. Need for product-market synchronisation. Need for multi-skilled and empowered labour.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Modern industry: some effects of market fragmentation Customer choice and empowerment generally has had wide implications on manufacturing concerns. 2012 12 . Complexity of production scheduling. Need for product flexibility and versatility and the development of ‘Advanced Manufacturing Technology (AMT)’.

Consider also the table below. The main differences between financial accounting and management accounting Financial accounting 1 Provides information for external users 2 Is often a legal requirement 3 Is subject to GAAP and accounting standards 4 Must generate accurate and timely data 5 Records historical facts Management accounting Provides information for internal users Is not a legal requirement Is not subject to GAAP or accounting standards Emphasises relevance and flexibility of data Has more emphasis on future events and decisions Focuses on parts (such as individual contracts) as well as the whole of a business Draws heavily from other disciplines such as 13 . economics and operational research Is a means to an end 6 Looks at the business as a whole 7 Primarily it stands by itself 8 Is an end in itself ©Tony Surridge Online and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Management accounting versus financial accounting The diagram on the next screen helps us distinguish the role of management accountancy from the role of financial accountancy. 2012 www.

Employees: .Based on Accounting and Financial Standards (GAAP) .Legal factors .Competitiveness .the Inland Revenue .Innovation .tonysurridge.existing .the Customers and Excise (re VAT) .Predictions .Social factors . such as .suppliers .Customer/consumer (market) research Use of sophisticated forecasting methods: Management Accounting Information System/ Strategic Management Accounting System Incorporates FAIS and also encompasses: .present . 2012 www.creditors .Business advisors (those people advising others on how to invest) .Financial values .Non-financial data .potential investors .Historical (results) .Segmental reporting Performance analysis in terms of: .Mainly holistic Is of limited use for managers MAIS/SMAIS Information designed for: .Resource utilisation .Designed for external users: .Shareholders: .Internal .Technological factors .co.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Modern Management Accounting Information Systems (MAIS) Financial Accounting Information System (FAIS) Management Accounting Information System (MAIS) Environmental analysis: .past (if receiving a pension from the company) .Other interested parties FINANCIAL ACCOUNTING INFORMATION SYSTEM (FAIS) Main focus: .Quality .potential recruits .The loan group: .uk 14 .Operational (‘action’) management Operates within ‘modern industry’ * Note: SMAIS is ‘Strategic Management Accounting Information System’ Use of modern MAIS and SMAIS* techniques and practices Designed to produce management information and support Fully supported by information systems and information technology and purpose designed systems Main focus on ‘continuous improvement’ ©Tony Surridge Online Limited.External data .Competitive analysis .Government agencies.Strategic management .Economic factors .bankers .Tactical (‘executive’) management .Political factors .Flexibility .

200 (A) in the next month. Attention placed on feedback control (reactive management) – little focus is placed on feedforward needs (proactive management). such as customers [market] and competitors are given low priority. Inflexibility – systems relate to ‘programmed decisions’ and the production of structured/routine reports. The system is based on ‘periodical’ (e. The main concentration is on internal performance reports based on internal data 15 . inaccuracies and misinterpretation.e. say. ©Tony Surridge Online Limited.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Weaknesses of traditional management accounting information systems (MAISs) Orthodox (traditional or conventional) MAIS have failed to remain relevant in the face of changing business environments and management needs. Unhelpful variances reported in cybernetic control systems. totals. Attention is placed on ‘What?’ and much less focus placed on the important questions of ‘How?’ and ‘Why?’. Not much business ‘intelligence’ gathering is facilitated. Reports and information are mainly designed for operational managers – little attention is placed on the needs of strategic management. The translation of events into money surrogates causes Aggregated information is reported.g.000(A) variance in one month and a $5. External (environmental) factors.g. Lack of attention is placed on what causes overhead costs – thus resulting in the reporting of misleading information concerning this significant (and rising) cost. Weaknesses include the following: D A T A Delays in the production of reports. as far as the manager is concerned? Timeframe of reports is mainly historical (results based). i. Memory jog: Remember the problem with using traditional management accounting systems and techniques is that they often result in a ‘DATA FAILURE’. This can be misleading for managers. between a $5. traditional standard costing variances which are inappropriate. What is the difference. monthly) or ‘batch’ reports. e. 2012 www.tonysurridge. F A I L U R E Financial orientation.


2012 www.tonysurridge. Traditionally.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Management Accounting Information System (MAIS) Other internal data Control systems Risk appraisal and management External data Performance appraisal  Costing methods  Costing techniques Business environment Main responsibilities of management accountants Internal audit COST ACCOUNTING SYSTEM Source Documents Cost Often maintained as a integral apart of the Financial Accounting System data MANAGEMENT Strategic Decision making Control of decisions ACCOUNTING INFORMATION SYSTEM Analytical Tactical Interpretation Specialist software Operational Conventional accounts Inventory account Responsibility of management accountants Routine (periodic) reports Work-inprogress account Special (ad hoc) reports Wages account Finished Goods account Overhead account Cost of Goods Sold account Operating Profit/Loss account Management accountants usually maintain their own accounts within a computer-based accounting system that also contains the necessary financial 17 . this was referred to as ‘Cost accounting’ ©Tony Surridge Online

manufacture of soap. .Similar to ‘job’ but often takes more than one year to complete.General purpose machinery (machine set-ups PROCESS PRODUCTION PROCESS COSTING . batches.There may be penalties for over-run.).Two or more products output from the same processing operation which are indistinguishable up to their point of separation.Continuous nature of the production process – oil refining. identified ‘internally’ (usually products made for finished goods inventory) CONTRACT PRODUCTION CONTRACT COSTING MANAGEMENT DECISIONS Specific Order Costing COST Continuous Operation Costing DATA MANAGEMENT NONMANUFACTURING CONCERN NONMANUFACTURING COSTING CONTROL The aim is to identify the average cost of a series of similar cost objects (units) over a period of time of .Price of contract is agreed in advance. . . . . chemicals.tonysurridge.Contract provides for ‘stage-payments’.Separate identifiable group of similar units. foods. 18 .Single identifiable unit. Mining Farming Merchandising Service provision.Usually the work is performed away from the company’s premises.Complex production planning and control.More ‘craft skill’ required. etc.Many cost items normally classified as overhead are treated as ‘direct’ costs.Complex production logistics. etc. 2012 www. . ©Tony Surridge Online Limited. . OR BATCH PRODUCTION BATCH COSTING  jobs. drinks. JOINT AND BYPRODUCT PRODUCTION JOINT AND BYPRODUCT COSTING Note that a type of costing system is contingent on the method or mode of production. .Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Modes of production and associated methods of management accounting . JOB PRODUCTION JOB COSTING This method involves  specific orders by ‘external’ customers. . .General purpose machinery (machine set-ups between batches). . . .Maintains a separate identity throughout the different production processes.

as required  plan to coordinate the different activities Planning and decision making Managers need to  be aware of their objectives which may be short-term and/or long term  be aware of the problems they face and their significance and consequence  consider optional courses of action  evaluate the options to decide which is best  make a decision Controlling Strategic management Tactical (executive) management Operational management Levels of decision making  Controls are based on plans/decisions  Results are monitored (recorded)  Periodically. often or .to change the plan or objective. future consequence and to identify potential remedy  Corrective (control) action is planned: . results are compared with the objectives of the plans/decisions  Variances (the difference between the objectives and results) are calculated  The variances are investigated for cause.bring the activity into line with the plan/objective Paper 5 is concerned with management accounting’ – so we ought to remember the responsibilities of the managers who are supported by the management accountants! ©Tony Surridge Online Limited.tonysurridge. 2012 19 .  train the people involved. which might require recruitment  issue ‘Terms of Reference’ (job descriptions. significance. procedure instructions. etc).Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Main roles of the manager The elements of management:      Planning Controlling Organising Motivating Decision making Motivating Managers will try to  motivate individuals to work hard towards achieving their personal objectives and work assignments  motivate groups/teams of people Organising Managers:  need to plan their objectives and decide the work required to achieve them  decide what decisions will need to be taken in the work  need to break the work into manageable tasks  link people with tasks.

C. Product-market portfolio Major tactical manoeuvres. TACTICAL PLANS OPERATIONAL PLANS - Financing working capital investment Budgetary control. One such functional area is the Finance Department and the Treasury Manager would be an example of an executive working in the Finance Department.tonysurridge.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Strategic.Medium. 2012 Vitruvius Pollio. tactics and day-to-day operations link to management decision-making. acquisition. ix. De Architectura. credit control. payroll. such as ‘green field’. 215 ©Tony Surridge Online Limited. forming business alliances. tactical and operational financial management FINANCIAL MANAGEMENT Corporate strategy concerns: Decisions made by senior management. ORGANISATION Strategic investment decisions (SIDs) Capital structure Dividend policy Long-term financing Portfolio management Risk reduction - CORPORATE STRATEGY One member of the Board is usually the Finance 20 . . DECISION FRAMEWORK It is useful to see how financial strategy. In the Finance Department.project planning and control . standard costing and variance analysis Cash management Working capital management Operational decisions regulate day-to-day activities designed to implement corporate policy and tactical plans.Foreign exchange management Tactical decisions are the responsibility of different functional (departmental) executives aimed at achieving the intended business strategies.and short-term financing . Major marketing decisions. cash management and the like. including . operational decisions are concerned with ledger accounting.budgetary control . Eureaka! (I’ve got it!) Archimedes 287 – 212 B.Short-term financial decision making.

2012 www.” ©Tony Surridge Online 21 . Feedback and feed-forward based on internal performances and external events. O F Objectives based on broad goals. Appropriate internal performance measures. Memory jog: an effective SMAIS will put a ‘STAMP OF’ value on the information provided to senior (strategic) management. in our opinion: quick action. Timely and external “Far too many managers have lost sight of the basics. and the fact that you can’t get any of these without virtually everyone’s commitment. Prediction systems. Monitoring systems. practical innovation. monitoring results and adapting plans. The SMAIS would involve the following: S T A M P Strategic decisions. identifying and evaluating optional plans. setting goals. service to customers.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management The role of ‘Strategic Management Accounting’ A strategic management accounting information system (SMAIS) should provide information to senior management at all stages of the strategic management process – strategic review.

products) but instead the FULL fixed production overhead costs are charged to the period’s costing profit and loss account ©Tony Surridge Online Limited. insurance. Costs are NOT absorbed into ‘cost objects’ (e. depreciation. product) Variable costs are incremental. variable with time (such as extra lighting costs caused by overtime) so ultimately it varies with the level of production (the overtime is used to produce products) variable with output of cost objects’ (e. (All fixed costs are period costs: rent. Production overhead costs Absorption costing Fixed production overhead costs are absorbed into ‘cost objects’ (e. Adjustment is made for over.g. products) such as oil used in multi-functional equipment 2. 2012 www.tonysurridge.g. There are two main types of absorption costing: (i) traditional absorption (ii) activity based costing (ABC) Marginal costing Fixed production overhead costs are treated as a period costs. product) Variable with ‘object’ (e. and (ii) marginal 22 .g. products).g.or underabsorption (recovery) Fixed production overhead Fixed in the period concerned.g.g. and thus inventory.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Accounting for fixed production overhead costs Direct materials Direct labour Direct expenses Variable with ‘object’ (e. there are TWO main ways of accounting for fixed overheads: (i) absorption costing.) Remember.g. product) Variable with ‘object’ (e. thus they are MARGINAL For control purposes variable production overhead costs can be regarded as TOTAL PRODUCTION COSTS 1. etc. product) Direct costs Variable production overhead Variable with ‘object’ (e.

3. 6. 7.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Activity Based Techniques ACTIVITY BASED COSTING (ABC) ACTIVITY BASED BUDGETING (ABB) ACTIVITY BASED MANAGEMENT (ABM) 1. (Because it is the activities which cause the costs. 3. CORE or PRIMARY ACTIVITY is one that adds value to a product/service. Each activity is termed a ‘Cost Pool’. 5. 4. For each activity it is necessary to identify one cost driver. Remember the significance of overhead in modern industry – so frequent questions on ABC can be expected. 8. Calculate the cost per ‘cost driver’ (by dividing the result of Stage 4 by the results of Stage 6).economies or diseconomies . Absorb overhead costs into the jobs/ products on the basis of the use of the cost driver transactions of each. 2.tonysurridge. either on a historic basis (unusual) or on a budget (future plan) basis (common).co. ACTIVITY ANALYSIS ACTIVITY BASED PERFORMANCE INDICATORS Cost control focus 1.the pattern of capacity utilisation as it affects fixed costs. Trace the costs of overheads to the activities. 3. (The cost driver is what causes the overhead cost to increase or reduce. ©Tony Surridge Online Limited. DIVERSIONARY ACTIVITIES do not add failure and are symptoms of failure within the 23 . Determine the number of cost driver transactions for the period under review.learning (or spillover) from one industry to another) . Identify the area of work from which costs need to be absorbed. Identify each of the separate activities on which the overhead costs are incurred. and there should only be one cost driver per activity). 2012 www.costs drivers . 2. AREA OF WORK (ACTIVITY) Types of activity 1. 2. Establish size and growth of the cost. SECONDARY ACTIVITY is one that supports a core activity. Analyse cost behaviour in respect of: . such costs should be direct with the minimum of apportionment being necessary). Consider the competitiveness of methods (for which cost is attributed).

Example A 'set up' is the work needed at the end of one job or batch of work to get the production process ready for the next job or batch. services and resources are increasing their profitability. Definition: Activity based costing (ABC) An approach to costing and monitoring of activities which involves tracing resource consumption and costing final outputs.tonysurridge. While mainly used for private businesses.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: The Activity Based Costing (ABC) system . Costs are assigned to specific activities .and then the activities are associated with different products or services. The paint machine would need to be closed down. An example would be the need to change the colour of paint in a paint machine between the manufacture of one batch of products and a batch of different products. Activity-based costing first gained prominence in the 1980s. although some overhead costs are variable in the short term. Assumptions underlying ABC The assumptions underlying ABC are: (a) (b) (c) (d) activities consume resources. the consumption of resources drives cost. It emerged as a logical alternative to traditional cost management systems that tended to produce insufficient results when it came to allocating costs.Overview A modern approach for calculating product costs is activity based costing which emphasises the need to obtain a better understanding of the behaviour of overhead costs and in doing so ascertains what causes cost. in the long-run. all overhead costs are variable. engineering. products. 2012 www. It is obvious that the overhead cost involved (including the machine downtime cost) would be the same regardless of the number (volume) of products involved in the new the ABC method enables a business to decide which products. however. or manufacturing . many overhead costs do not necessarily vary with production volume or service level. Managers are then able to generate data to create a better budget and gain a greater overall understanding of the expenses that are required to keep the company running 24 . Harvard Business School Professor Robert Kaplan was an early advocator of the ABC system. cleaned and then the new (required) paint put into the machine before the new production starts. services and other cost objects use activities. Resources are assigned to activities and activities to cost objects based on consumption estimates. End of Example ©Tony Surridge Online Limited. In this way. The latter utilise cost drivers to attach End of definition ABC is an accounting method that allows businesses to gather data about their operating costs. ABC has also been used in public forums. stripped.such as planning. such as those that measure government efficiency. and which are contributing to losses.

An activity may have multiple cost drivers associated with it.g. A measure of the frequency and intensity of the demands placed on activities by cost objects. Examples of some of the cost drivers used by ABC systems include: the number of receiving orders for the receiving department. the number of customer orders measures the consumption of order entry activities by each customer. it is the machine hours that drive the consumption of power. the consumption cost and the number of machine hours would also increase by 10%. Definitions Activity cost pool. receiving. End of Definitions ©Tony Surridge Online Limited. Examples include machine-related activities (such as machining cost centres). parts administration. If production volume increased by 10%. e. The identification and evaluation of the activity drivers used to trace the cost of activities to cost objects. packing and dispatching. the number of set-ups would represent the cost driver for production scheduling. Activity driver. total cost of all set ups might constitute one cost pool for all costs related to the set-ups. ABC systems use volume-related cost drivers such as direct labour hours or machine hours. For example. Volume related cost drivers are appropriate in some cases For those costs which are purely variable with output in the short term. (ii) Step 3 A cost pool is created for each activity. Step 2 Identify factors which influence the cost of a particular activity. if a production scheduling cost is caused by the number of production runs each product generates.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: The steps in Activity Based Costing (ABC) There are four main steps in establishing and implementing a system of activity-based costing: Step 1 Identify the major activities in the 25 . Step 4 The cost of each activity is traced to products according to the product's usage of these activities during the production process (using cost drivers as a measure of demand). This is measured by the number of cost-driver transactions which the product uses. the quality of parts received by an activity is a determining factor in the work required by that activity and therefore affects the resources required. production scheduling. and the number of dispatch orders for the dispatch department. A grouping of all cost elements associated with an activity. The term 'cost driver' is used to describe the events or forces that are the significant determinants of the cost of the activities. For example. 2012 www. direct labour-related activities (like assembly departments) and various support activities such as ordering.g. the number of production runs undertaken for scheduling and set-up costs. Activity driver It may also involve selecting activity drivers with potential to contribute to the management accounting function with particular reference to cost reduction. An example is power costs charged to products using machine hours as the cost driver. Cost driver. e. the number of purchase orders for the cost of operating the purchasing department. (i) Cost behaviour must be understood ABC recognises that cost behaviour is dictated by cost drivers and therefore the tracing of overhead costs to products requires that cost behaviour must be understood to identify appropriate cost drivers. Any factor which causes a change in the cost of an activity. materials handling.

Practice question on ABC related topics: Spring Company Page 313. that by burdening the product with fixed cost on the basis of cost-diver usage. It is argued. One important aspect of quality is to remove waste (non-valueadding activity) from processes. ‘MADE’ ©Tony Surridge Online Limited. By using ABC managers are made aware of how the overhead is spent. Takes account of fixed overhead costs into the calculation of ‘profitability’ (the ‘cost-volumeprofit’ algorithm). Questions are prompted: How can this cost be reduced? What has been the growth of this costs and why? And so on.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Benefits of using activity based costing (ABC) The use of ABC methods offers a number of benefits: Q U E Quality management is aided. With 26 . When managers make decisions that affect the use of cost drivers they become responsible for their actions and can thus be held The essence of effective control rests on ‘controllability’. waste. Effective product pricing. Memory jog: Remember by using ABC a ‘QUEST’ is to improve decisions and reduce and control costs. With ABC it is argued that fixed overhead costs are relevant because the decision may cause a change in the overhead cost. certainly in the medium term. highlighted. costed and efforts be made to reduce it. the ABC system more accurately traces fixed costs to products. when price is set on the basis of ‘full cost plus mark-up’. 2012 www. Design of products/services can be done in ways that ‘design out’ the higher costs caused by the use of cost drivers. such as idle time can be identified as an activity. Efficient cost control. S T M A D E Make or buy decisions rest on a comparison of ‘relevant costs’. The concept of overhead cost drivers more precisely defines a manager’s authority and thus responsibility for the cost. (With orthodox systems ‘fixed overhead’ is regarded as being ‘uncontrollable’ by individual managers.) Support activities (which comprise a significant part of fixed overhead cost) are identified and better controlled. Traditionally profitability has been measured by ‘contribution’ and fixed costs (which can represent 80% . Accountability of managers becomes defined.90% of the total cost) has been ignored (as ‘not relevant’). Understanding of cost by managers is improved.

One of the principal problems of ABC is that it may be difficult to collect the information required to enable ABC to be introduced. Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products. Many overheads relate neither to volume or to complexity and diversity. it is important to realise that the only purpose of ABC is to provide information to management. Some people have questioned the fundamental assumption that activity causes cost. but it is not as large as the overhead costs before ABC is employed. some overhead costs are difficult to assign to products and customers. 2012 27 . No one clear cause of cost can be identified. While lean accounting is primarily used within lean manufacturing. their occurrence. Information required. suggesting that it could be argued that decisions cause cost. M A Many overheads are not suitable for ABC. Lean accounting methods have been developed in recent years to provide relevant and thorough accounting. and measurement systems without the complex and highly wasteful methods of ABC. there is no reason to assign any cost in an arbitrary manner. Although developments in information technology and software allow for more sophisticated information systems. However there are people who argue against the use of ABC.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Criticisms of introducing an activity based costing (ABC) system In a business organisation. The ability of a single cost driver to fully explain the cost behaviour of all items in its associated pool is questionable. or that there may be no one clear cause of cost. outsourcing and identification and measurement of process improvement initiatives. N I C Memory jog: companies should not be too ‘MANIC’ in their enthusiasm to introduce an ABC system www. Information collection and retrieval systems may therefore need to be expanded and improved. Arbitrary cost apportionment may still be necessary. ABC has predominantly been used to support strategic decisions such as This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products. Kaplan stated that ‘ABC has stagnated over the last five to seven years’. As such. construction. the cost of the required changes and improvements may outweigh the anticipated benefits of ABC and make its introduction unsuitable. The main criticisms directed against introducing an ABC system are listed below.tonysurridge. Installing an ABC system is technically complex. The various activities within the organisation need to be established (possibly by using observation and employee interviews) and cost drivers identified. ABC has been found to be a very high-cost accounting technology. Lean Accounting takes an opposite direction from ABC by working to eliminate cost allocations rather than find complicated methods of allocation. Even in activity-based costing. control. the ABC methodology assigns an organisation's resource costs through activities to the products and services provided to its customers. A database of activities. This is a huge wealth of information which may not have been recorded before. government. and other industries. financial services. for example the chief executive's salary. Costs involved. For example. or the passage of time causes cost. and whether it is good value is questioned. ©Tony Surridge Online Limited. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. the approach has proven useful in many other areas including healthcare. It is generally used as a tool for understanding product and customer cost and profitability. their cost and cost drivers needs to be set up. requiring talented personnel and a considerable amount of time and money . in 1998.

uk 28 . whatever remains. Significant service overhead costs exist which are not easily assigned to individual products. ABC will usually result in significantly different product or service overhead charges.tonysurridge. must be the truth. compared with traditional absorption costing. ‘COSTS’ How often have I said to you that when you have eliminated the 2012 www. In such cases. Some products or services are sold in large numbers but others are sold in small numbers. not volume. Overhead costs are related to products/customers. Memory jog: ABC is a method of sharing overhead between products or services. Sherlock Holmes Arthur Conan Doyle. 1859 .1930 ©Tony Surridge Online Limited. as in the case of job costing. Tailored made products.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management When is activity based costing relevant? Activity-based costing could provide more meaningful information about product costs and profits when: C O S T S Complex products or services are involved. Where products or services are tailored to product/service specifications. however improbable.

On the contrary. providing information that is relevant and actionable. Provide accurate. Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control. Support the lean culture by motivating investment in people. and yet they are used to make important and far-reaching decisions. profitability. product rationalisation. 2. 2012 www. What is Lean Accounting? Lean accounting is accounting for the lean enterprise.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Fact Sheet: Lean Accounting Lean Accounting is not specifically mentioned in the syllabus – although the presence of back-flush accounting. • • The Vision for Lean Accounting 1. ©Tony Surridge Online Why is Lean Accounting Needed? Everybody working seriously on the lean transformation of their company eventually bumps up against their accounting systems. life-cycle accounting and throughput accounting infer that it is being questioned. and for decision-making leading to increased customer value. the opposite of lean-goals. The traditional accounting systems have no good way to identify the financial impact of the lean improvements taking place throughout the company. and cash flow. Very few people in the company understand the reports that emanate from the accounting systems. and internal reporting requirements. profitability. the financial reports will often show that bad things are happening when very good lean change is being made . It seeks to move from traditional cost accounting to a system that measures and motivates good business practices in the lean enterprise. it is not a bad idea to mention it in the exam simply to communicate to the examiner that you are interested in the subject and are up-to-date with your knowledge. 3. It soon becomes clear that traditional accounting systems are actively antilean: • • • They are large. 29 . They use standard product costs which are misleading when making decisions related to quoting. and so forth. external reporting regulations. and wasteful processes requiring huge amounts of non-value work. and empowers continuous improvement at every level of the organisation. 4. timely and understandable information to motivate the lean transformation throughout the organization. make/buy. They provide measurements and reports like labour efficiency and overhead absorption that motivate large batch production and high inventory levels. Fully comply with generally accepted accounting principles (GAAP). growth. complex.tonysurridge. Anyway.

In this case.” French proverb ©Tony Surridge Online Limited. In this case. we might determine that overseas orders involve more work than home orders and apply a weighting to the overseas orders to reflect the extra work. “Every bee’s honey is sweet. Here. number of power drill operations. Advocates of activity-based techniques have also suggested three ways of classifying cost drivers. because some products involve more complicated and time consuming set-ups than others. rather than charging all purchase orders with the same cost per order. etc. Transaction drivers. e.g. A cost driver is any activity that causes a cost to be incurred. Examples would include the number of set-ups. Intensity D Duration drivers.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Cost drivers used in activity based costing A "cost driver" is the unit of an activity that causes the change of an activity cost. the cost of an activity is affected by the number of times a particular action is undertaken.) Be proud of everything that is unique about you. In traditional costing the cost driver to allocate indirect cost to cost objects was volume of output. e. With the change in business structures. Remember …. setup costs may not be related to the number of set-ups so much as to the set-up time. the cost of the activity is not so much affected by the number of times the action is undertaken as by the length of time that it takes to perform the 30 .g. 2012 www. number of batches of material received. number of purchase orders. or words of a song’ – Chambers 20th Century Dictionary.tonysurridge. The Activity Based Costing (ABC) approach relates indirect cost to the activities that drive them to be incurred. efforts would be directed at determining what resources were used in the making of a product or service. I T Memory jog: ‘DIT’ is not a difficult word to remember – it is almost poetical! (One meaning of DIT is ‘a poem. technology and thereby cost structures it was found that the volume of output was not the only cost driver.

co.000 $25. Linacre Co expects orders for Product ZT3 next year to be 100 orders of 60 units per order and 60 orders of 50 units per order.tonysurridge. are expected to be $900. The company holds no inventories of Product ZT3 and will need to produce the order requirement in production runs of 900 units. (9 marks) (20 marks) ©Tony Surridge Online Limited. (3 marks) (8 marks) $1·00 per unit 10 minutes per unit at $7·80 per hour 40% of total unit cost A A A (c) Discuss the reasons why activity-based costing may be preferred to traditional absorption costing in the modern manufacturing environment. (b) Calculate the total unit cost and selling price of Product ZT3.000 and these overheads are absorbed on a direct labour hour basis.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Linacre Co: Question .1 of 1 A question covering activity based costing Linacre Co operates an activity-based costing system and has forecast the following information for next year. Four tests are made during each production run to ensure that quality standards are maintained. Cost Pool Production set-ups Product testing Component supply and storage Customer orders and delivery Cost $105. Total direct labour hours for next year are expected to be 300. which cannot be linked to any specific activity.000 $300.000 General fixed overheads such as lighting and heating.500 Cost Driver Number of Drivers Set-ups 300 Tests 1.000 hours. One order for components is placed prior to each production 31 .000 $112. The following additional cost and profit information relates to product ZT3: Component cost: Direct labour: Profit mark up: Required: (a) Calculate the activity-based recovery rates for each cost pool. 2012 www.500 Component orders 500 Customer orders 1.

©Tony Surridge Online x 10/60 = Activity Setting up Product testing Component supply Customer supply ABC recovery rate $350·00 per set-up $200·00 per test $50·00 per order $112·50 per order Number of Drivers 10 set-ups 40 tests 10 orders 160 orders General overheads = 1. These overhead absorption rates may be factory-wide absorption rates (blanket rates) or.000 $25.500 34. usually based on labour hours.000 4.500 Q (b) Production of product ZT3 = (100 x 60) + (60 x 50) = Number of production runs = number of set-ups = 9. indirect costs constituted a relatively small proportion of total product cost compared to direct costs such as direct material cost.000 = Profit mark up Selling price $ 1·00 1·30 3·83 6·13 2·45 8·58 (For our Fact Sheet on ABC Page 47.) (c) Traditional absorption costing allocates a proportion of fixed overheads (indirect costs) to product cost through an overhead absorption rate. Cost Pool Production set-ups Product testing Component supply/storage Customer orders/delivery Cost $105. or some other volume-related measure of activity.500/9. departmental absorption rates.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Linacre Co: Answer .000/300.500 hours Annual cost ($) 3.000 customer orders ABC Recovery Rate $350·00 per set-up $200·00 per test $50·00 per order $112·50 per order 9.000 30.000/900 = Number of product tests = 10 x 4 = Number of component orders = number of production runs = Number of customer orders = 100 + 60 = General overheads absorption rate = 900. 2012 www.500 8.tonysurridge. machine hours. for increased accuracy in determining product cost.500 Number of Drivers 300 set-ups 1.1 of 2 A question covering activity based costing (a) Activity-based recovery rates are found by dividing the expected cost in each cost pool by the number of cost driver transactions expected during the coming year.000 500 18.500 x $3·00 per hour = Total annual overhead cost Total unit cost Components Direct labour = 7·80 x 10/60 = Overheads = 34.000 $112.000 units per year 10 set-ups 40 tests 10 orders 160 orders $3·00 per direct labour hour 1. In the traditional manufacturing environment.500 tests 500 component orders 1.000 $ Q 32 .000 = Annual direct labour hours for Product ZT3 = 9. direct labour cost and direct expenses (collectively referred to as prime cost).

the required level of production is used to determine the required number of cost driver transactions (e. rather than an incremental approach based on prior year figures. since managers can promote higher margin products while seeking to improve margins on products where margins are lower. This increases the frequency of production line set-ups and therefore the total cost arising from set-up Q Q 33 . Direct labour cost as a proportion of total cost has therefore declined. This more detailed product cost information can lead to improved cost control. Activity-based budgeting Budget planning and formulation can use an activity-based approach to determining the required level of support activities. failed to take account of the relationship between costs. An average of fifteen ABC cost drivers tends to be used. If set-up costs were transferred using number of set-ups as the cost driver. With activity-based budgeting. This decline has been accelerated by the use of salaried employees rather than staff whose wages depend on production output.tonysurridge. Modern manufacturing is characterised by shorter and more frequent production runs rather than continuous or high volume production runs. transferring labour costs from a direct cost to an indirect cost.) Activities and costs Traditional absorption costing. a fairer allocation of set-up costs would be achieved and products with longer production runs would not be penalised with a disproportionate share of their indirect costs. Analysis of the way in which products consume activities allows the overhead costs incurred by those activities to be related to product cost using cost drivers derived from those activities rather than using production volume-related overhead absorption rates. compared with one or two overhead absorption rates in traditional absorption costing. by employing volume-related overhead absorption rates. This can lead to better decisions on product promotion and pricing. can optimise the number of production runs in order to minimise set-up costs.2 of 2 A question covering activity based costing The modern manufacturing environment In the modern manufacturing environment. (For our Fact Sheet: Modern Industry . Widespread use of computer control and automation has decreased the importance and use of direct labour. The insight at the heart of activitybased costing is that it is activities that incur costs and products that consume activities.g. There are several reasons for this. Production scheduling. activities and which in turn are used to determine the level of support activity that must be budgeted for (e. 2012 www. Improved cost control Activity-based costing can lead to more detailed product cost information because a larger number of ABC cost drivers are likely to be identified in a given manufacturing organisation. For example. set-up costs under traditional absorption costing could have been allocated to product cost using an overhead absorption rate based on machine hours.g. managers have more accurate information on the relative profitability of individual products. This would transfer a disproportionate amount of set-up costs to high volume products. Increased use of just-in-time production methods and customer-led manufacture has led to quality control costs and production planning costs forming a higher proportion of total cost. In this way managers can seek to identify and eliminate any unnecessary slack in support activities.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Linacre Co: Answer . indirect costs constitute a relatively high proportion of total product cost.Page 30. for example. These costs relate to particular production runs rather than to manufacture as a whole. ©Tony Surridge Online Limited. since managers can seek to control costs by controlling the activities that cause the costs to be incurred. which in fact gave rise to fewer setups because of their longer production runs. number of set-up engineers). Better information on product profitability Since product cost information is more accurate. thereby improving efficiency and profitability. number of set-ups).

Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management CONTENTS SHEET 1 OF 7 Title SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES Only the hyperlinks shaded in pink are active for this sample download Chart Chart Mnemonic Mnemonic Chart Chart Chart Mnemonic Chart Chart Chart Chart Mnemonic Chart Chart Chart Mnemonic Mnemonic Mnemonic Chart Mnemonic Chart Chart Mnemonic Chart Chart Chart Mnemonic Mnemonic Chart Chart Chart Mnemonic Chart Chart Chart Chart Chart Modern industry Traditional versus modern Industry Modern industry Modern organisation structures Modern industry: some effects of market fragmentation Management accounting versus financial accounting Modern Management Accounting Information Systems (MAIS) Weaknesses of traditional MAISs Finance function within a large company/group Management Accounting Information System (MAIS) Modes of production and associated methods of management accounting Main roles of the manager The role of ‘Strategic Management Accounting’ Accounting for fixed production overhead costs Activity based techniques The Activity Based Costing (ABC) system – Overview Benefits of using activity based costing (ABC) Criticisms of introducing an ABC system When is activity based costing relevant? Lean Accounting Cost drivers used in activity based costing Target costing – Overview Traditional cost management versus target cost management The underlying philosophy of target costing Case study: Target costing Target costing – new product New-product target costing The ‘cost reduction’ management approach Cost reduction techniques Life Cycle Costing (LCC) – Overview Life-Cycle Costing (LCC) Costs and expenditures of the product-life cycle Benefits of using Life Cycle Costing (LCC) Throughput Accounting (TA): Overview The concepts of throughput accounting Throughput accounting: A summary Example of a bottleneck constraint in a factory Theory Of Constraints (TOC) and the use of the Five Focusing Steps 38 39 40 41 42 44 45 46 47 49 50 51 52 53 54 56 57 58 61 62 63 64 65 66 67 68 69 70 71 72 73 Note: some pages notated as ‘Chart’ consist of discussion sheets.tonysurridge. 2012 www. ©Tony Surridge Online 34 Only the hyperlinks shaded in pink are active for this sample download Page 29 30 32 33 34 35 36 37 .

2012 www.tonysurridge.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management CONTENTS SHEET 2 OF 7 Title SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES Mnemonc Mnemonic Chart Mnemonic Mnemonic Chart Chart Mnemonic Mnemonic Mnemonic Mnemonic Chart Mnemonic Mnemonic Mnemonics Chart Mnemonic Chart Chart Mnemonic Mnemonic Chart Chart Chart Mnemonic Chart Chart Mnemonic Chart Chart Chart Chart Chart Chart Chart Mnemonic Mnemonic Mnemonic Constraints on throughput Assessment of throughput accounting (TA) Distinctions between throughput costing and orthodox cost accounting Environmental accounting: Direct and indirect costs Environmental accounting: Contingent or intangible environment costs Environmental accounting: Environmental accounting procedures Environmental reports and communications. ©Tony Surridge Online 35 . prices and offers Cost-based pricing strategies Cost-based pricing strategies Cost-based pricing strategies: cost variables Demand-based pricing strategies Demand-based pricing strategies Differential calculus The decision cycle Appropriateness of Relevant Costing Relevant costs Relevant costs The qualitative (non-financial) issues surrounding make versus buy decisions The financial issues surrounding make versus but decisions The qualitative (non-financial) issues surrounding the ‘stay open or close’ decision 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 101 104 105 106 110 112 113 114 115 117 118 119 Note: some pages notated as ‘Chart’ consist of discussion sheets.the two main roles Environmental accounting: Environmental reports and communications Environmental accounting: Objectives of environmental accounting Page 29 74 75 76 77 78 79 80 81 82 DECISION-MAKING TECHNIQUES Benefits of identifying and understanding costs Classification of costs Function of costs Factors that influence cost behaviour Assumptions underlying breakeven calculations Applications of break-even charts Rules for short-term cost-based decision making Limitations of the linear programming model Pricing strategy: Overview Examples of pricing objectives Factors that influence a company’s pricing strategy Determinants of price elasticity of demand Price elasticity of demand Linear approximation of a curvilinear function Marginal revenue and marginal costs Analysing competitors’ costs.

tonysurridge. maximin and minimax regret techniques Probability and expected values Problems of using expected values in budgeting Using decision tree analysis Benefits of using decision tree analysis Limitations of using decision tree analysis Page 83 120 121 125 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 152 153 154 155 156 157 158 165 166 167 168 171 175 BUDGETING Budgetary control – The main areas of study Budgets and budgetary control Role of the Budget Officer Budgetary control procedures Budgetary control feedback loop Principles of responsibility accounting A structure for ‘Responsibility Accounting’ Terms used in ‘Responsibility Accounting’ and the role of the management accountant Examples of cost responsibilities Benefits of ‘Responsibility Accounting’ Problems associated with ‘Responsibility Accounting’ Advantages of budgetary control Stages involved in a budgetary control system Cybernetic control systems Cybernetic control: Feedback Problems when using a ‘closed feedback control loop’ Cybernetic control: feed-forward Feed-forward control Top-down and Bottom-up budgeting Bottom-up planning: a caution Example of a bottom-up budgetary control system in a manufacturing concern Example of an incremental budget plan as part of an incremental budgeting system Justification for using the incremental (periodic) budgeting approach Disadvantages of using the incremental (periodic) budgeting approach Zero-based budgeting (ZBB) Example of a ‘Mutually-exclusive decision package’ as part of a zero-based budgeting system Justification for using the zero-based budgeting (ZBB) approach Note: some pages notated as ‘Chart’ consist of discussion 36 . 2012 www.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management CONTENTS SHEET 3 OF 7 Title SPECIALIST COST AND MANAGEMENT ACCOUNTING TECHNIQUES Mnemonic Chart Chart Mnemonic Chart Mnemonic Mnemonic Chart Chart Chart Chart Chart Mnemonic Chart Chart Chart Mnemonic Mnemonic Mnemonic Mnemonic Chart Chart Mnemonic Chart Mnemonic Chart Chart Chart Chart Mnemonic Mnemonic Chart Chart Mnemonic The financial (monetary) issues surrounding the ‘stay open or close’ decision Maximax. ©Tony Surridge Online Limited.

) Budgeted Financial Position (Balance Sheet) (including Chilgrove) Reasons for having a budgeted financial position (balance sheet) .uk 37 .as part of the ‘Master budget’) Problems with budgetary control Quantitative ways of separating fixed and variable costs Problems with using the high-low method of cost estimation Scattergraph: example Flexing a budget Correlation analysis Time-series analysis Forecasting seasons: additive method Forecasting seasons: proportional method The distinction between additive and proportional models Page 135 176 177 178 179 180 181 182 183 184 185 186 187 188 189 190 191 192 193 194 194 195 196 197 198 199 200 201 202 203 204 205 206 207 210 211 212 213 Note: some pages notated as ‘Chart’ consist of discussion sheets.) Plant Utilisation Budget Production Overhead Budget (including Chilgrove Research and Development Budget Master Budget Cash Budget (including Chilgrove Co.) Direct Materials Cost Budget (including Chilgrove Co. ©Tony Surridge Online Limited.) Selling and Administration Budget (including Chilgrove Co.for closing date .) Budgeted Income Statement (including Chilgrove Co.tonysurridge.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management CONTENTS SHEET 4 OF 7 Title BUDGETING Mnemonic Disadvantages associated with the zero-based budgeting (ZBB) approach Chart Activity-based budgeting (ABB) Chart Example of an activity cost matrix for a sales order department as part of an activity-based budgeting (ABB) system Mnemonic Justification for using the activity-based budgeting (ABB) approach Chart Rolling budgets Mnemonic Justification for using the rolling budgeting approach Mnemonic Disadvantages associated with rolling budgets Chart Overviews of incremental budgeting and zero-based budgeting Chart Overviews of activity-based budgeting and rolling budgets Mnemonic Ways of implementing a change to a company’s budgeting system Mnemonic Mnemonic Chart Mnemonic Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Mnemonic Chart Chart Mnemonic Chart Mnemonic Chart Chart Chart Chart Chart Difficulties of changing a budget system Constraints and limiting factors in budget planning Chilgrove Co: Opening Financial Position (Balance Sheet) Factors considered in preparing the Sales Budget Chilgrove Co: Sales Budget Production Budget (including Chilgrove Co. 2012 www.) Direct Labour Cost Budget (including Chilgrove Co.

2012 38 .Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management CONTENTS SHEET 5 OF 7 Title BUDGETING Chart Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Learning curve Uses for the learning curve Potential problems associated with the learning curve Difficulties of budget forecasting Assumptions made in the budget planning stage Aides to budget forecasting Factors which affect the degree of forecasting success Evaluation of forecasting techniques Sources and causes of forecasting errors Ways of reducing forecasting errors Behavioural problems of using participation in budgetary control system Pre-requisites for a successful participatory budgetary control system Page 135 214 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 232 233 234 235 236 237 238 239 240 241 242 243 244 247 248 249 250 Mnemonic Resolution of budget conflict Mnemonic Reasons why budget-holders set difficult to achieve budgets Mnemonic Reasons why budget-holders set easy to achieve budgets Mnemonic Ways that budget-centre managers use to ‘hide’ slack in budgets Mnemonic Reasons why ‘budget slack’ should be accepted Mnemonic Problems with accepting ‘budget slack’ Mnemonic ‘ Technical’ problems with budgetary control Mnemonic Difficulties of budget forecasting Mnemonic Benefits of using spreadsheets in budgeting Mnemonic Dangers inherent in using spreadsheets in budgeting STANDARD COSTING AND VARIANCE ANALYSIS Chart Chart Mnemonic Mnemonic Mnemonic Chart Chart Chart Chart Chart Chart Typical standard costing and variance analysis system Example of a ‘unit standard cost’ Classification of standards Purposes of using standard costing and variance analysis Problems associated with conventional standard costing and variance analysis Basic standard costing variances Idle time variance Example of an operating control report (absorption costing) Example of an operating report (including mix and yield variances) Example of an operating report (marginal costing) Problems with traditional standard costing variances Note: some pages notated as ‘Chart’ consist of discussion sheets. ©Tony Surridge Online

2012 www. ©Tony Surridge Online Limited. Examples of Objective Statements for QualTech Design Co. Performance Pyramid Main financial measures Value for Money Measuring performance in a hospital Benchmarking Benefits of business benchmarking Kaplan and Norton’s ‘Balanced Scorecard’ Two levels of strategic management Role of head office Responsibilities of divisional managers The divisional decision structure Different group structures Concept of ‘Principal-agency Theory’ applied to divisional structures Note: some pages notated as ‘Chart’ consist of discussion Examples of Goal Statements for QualTech Design Co.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management CONTENTS SHEET 6 OF 7 Title STANDARD COSTING AND VARIANCE ANALSYSIS Chart Chart Mnemonic Chart Mnemonic Chart Chart Chart Chart Mnemonic Mnemonic Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Chart Mnemonic Chart Chart Chart Mnemonic Chart Chart Mnemonic Mnemonic Chart Chart Mnemonic Possible causes of sales and cost variance Possible interrelationships between variances General causes of variances Investigation of variances Policy for investigation of variances Policy for investigation of variances Control chart based on materiality of deviation = 10% of standard Control chart based on materiality of deviation = 10% of standard Control chart based on statistical significance of 95% Ways of improving manufacturing labour efficiency (productivity) Causes for idle time in a manufacturing system Planning and operating variances: Market size and market share variances Steps for producing a performance report using planning and operational variances Example of an operating report (planning/operational variances) Page 237 251 252 253 254 255 256 258 259 260 261 262 263 265 266 267 268 269 270 270 271 272 273 274 275 276 277 278 279 280 281 282 283 284 285 286 PERFORMANCE MEASUREMENT AND CONTROL Performance measurement Hierarchy of objectives Example of Statement for QualTech Design 39 . Examples of Critical Success Factors Examples of Performance Indicators for QualTech Design Co.

co. ©Tony Surridge Online Limited.tonysurridge.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management CONTENTS SHEET 7 OF 7 Title PERFORMANCE MEASUREMENT AND CONTROL Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Mnemonic Chart Chart Mnemonic Mnemonic Mnemonic Chart Chart Chart Chart Chart Criteria used for measuring management performance Problems in trying to achieve goal congruence Performance indicators commonly used for measuring the performance of divisional management Advantages of the ROI performance measure Limitations of the ROI performance measure Management aspects over which management claim they lack controllability Putting divisional managers back in control Bases used for comparing performances Critical success factors for achieving customer satisfaction Success factors for a strategic management information system (SMAIS) The critical success factors for just-in-time (JIT) management The aims of transfer pricing between divisions Main problems with transfer pricing Types of cost-based transfer price Transfer price based on a variable (marginal) cost Problems with market-based transfer prices Problems with selling to the intermediate market Factors related to negotiated transfer prices The basis for negotiating a transfer price Dual transfer pricing Dual transfer pricing: A numerical example The framework for deciding a transfer price The rules of transfer pricing Page 267 287 288 289 290 291 292 293 294 295 296 297 298 299 300 301 302 303 304 305 306 307 309 310 Note: some pages notated as ‘Chart’ consist of discussion 40 . 2012 www.

Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Complementary Questions and Answers (Note: These Questions and Answers are also hyper-linked from appropriate teaching screens. Answer A divisional decision Question A company manufacturing agricultural machinery A question covering product mix decision and make or buy. Answer JD Company Question A divisional decision A question concerning a close down or stay open decision. Answer HYC Question Yam Co A question covering throughput costing.) Title Question Spring Company A question covering activity based costing and the use of performance measures Answer Spring company Question Linacre Company A question covering activity based Please go to the next screen ©Tony Surridge Online Answer Wargrin Question JD Company A question covering limiting factor analysis and the make or buy decision. 2012 41 . Answer A four-product company Question Small service company A question covering simulation modelling. Answer A company manufacturing agricultural machinery Question A four-product company A question covering Graphical Linear Programming.tonysurridge. Answer Knight Rider Manufacturing Company Page 312 313 317 318 320 322 326 328 330 331 333 334 337 339 341 342 344 345 347 348 354 355 356 357 359 361 This Question is active 1 OF 3 www. Answer Union Cars Company Question Knight Rider Manufacturing Company Decision concerning uncertain outcomes. Answer Small service company Question Union Cars Company A question covering a decision concerning uncertain outcomes. Answer Linacre Company Question Edward Limited A question covering Target Costing Answer Edward Limited Question HYC A question covering throughput accounting. Answer Yam Co Question Wargrin A question covering life-cycle costing.

Answer Wisko Question Mermus Company A question covering flexible budgeting and budget variances. Answer Responsibility accounting Question Sine Company A question covering the planning of a budget Answer Sine Company Question Spike Company A question covering budget revisions. Answer Additiv Company Question Seabrook Company A question covering the use of the learning curve to set standard costs Answer Seabrook Company Question Different types of standard A question covering the theory of standard costing Answer Different types of standard Question Ash Company A question covering standard costing variances Answer Ash Company Question Vogum Company A question covering basic variance analysis including mix and yield.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Complementary Questions and Answers Title Page 311 (Note: These Questions and Answers are also hyper-linked from appropriate teaching screens.tonysurridge. which requires operating reports using both absorption and marginal costing Answer Vogum Company Question Alk Company A question covering planning and operating variance analysis Answer Alk Company Page 367 368 371 372 374 376 379 380 383 385 386 387 389 390 396 397 401 402 404 405 408 409 416 417 2 OF 3 Please go to the next screen ©Tony Surridge Online Limited.) Question Responsibility accounting A question covering budgetary control and performance Answer Mermus Company Question Additiv Company A question covering moving averages and the Additive and Proportional methods of seasonal adjustment. Answer Budgeting systems Question Wisko A question covering flexible budgeting. Answer Spike Company Question Budgeting systems A question covering budget theory. 2012 42 .

) Title Question Lympne Conglomerates A question covering market volume and market share variances Answer Lympne Conglomerates Question Woodside Charity A question covering budget variances for a non-profit making organisation Answer Woodside Charity Question CAS Company A question covering return on investment (ROI) and residual income (RI) measures Answer CAS Company Question Bridgewater Co Divisional performance measurement Answer Bridgewater Co Question Ties Only Company Small company performance measurement Answer Ties Only Company Question MAS Company A question covering transfer pricing Answer MAS Company Page 423 424 425 426 429 430 433 435 438 440 443 444 3 OF 3 ©Tony Surridge Online 43 . 2012 www.Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Complementary Questions and Answers (Note: These Questions and Answers are also hyper-linked from appropriate teaching screens.

(Σy)2 )( ) Demand curve P = a .tonysurridge. 2012 www.( Σ x ) 2 Σy b Σx n n nΣxy − ΣxΣy 2 a = r = (nΣx .2bQ THIS FORMULA SHEET IS PROVIDED IN THE EXAM ©Tony Surridge Online Limited.bQ b = change in price change in quantity a = price when Q = 0 MR = a .Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management Formulae Sheet Learning curve Y = axb Where Y a x b LR = = = = = cumulative average time per unit to produce x units the time taken for the first unit of output the cumulative number of units the index of learning (log LR/log 2) the learning rate as a decimal Regression analysis y = a + bx b = nΣxy − ΣxΣy n Σx 2 .(Σx) 2 nΣy 2 .uk 44 .co.

Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management We hope you enjoyed our free sample. For the FULL WORKING version. 2012 online at.tonysurridge. and found it 45 .. ©Tony Surridge Online Limited. buy it NOW.

for your ACCA F5 studies. complete with all links. To buy the full version of 133 46 .. 105 Mnemonics and 31 Questions and Answers. please go to www. 2012 www.TonySurridge..Mnemonics and Charts MAIN PAGE FORMULAE Paper F5: Performance Management But that link will not work in this free sample “Dedicated to the Accountancy and Finance Profession” ©Tony Surridge Online Limited.

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